Financial Markets’ Relief on Greek Election Result Proves Short-lived

The
result of 17 June election in Greece is being regarded by the financial
markets as the best outcome possible in the circumstances, with pro-austerity
and pro-euro parties garnering the
majority of the vote, but further volatility in the months ahead is
expected.

The
New Democracy Party, whose mandate is to accept further austerity measures to
enable Greece to remain in the eurozone, secured 29.53% of the vote. The
left-wing Syriza party, which rejects the austerity programme, came second with
27.12%.

Commenting on the election result Italian
prime minister Mario Monti told reporters as he arrived at the G20 summit in
Mexico: “This allows us to have a more serene vision for the future of the
EU and for the eurozone. We hope that a strong government can be
formed which confirms the commitments made with the EU.”

Spanish prime minister Mariano Rajoy said the
result was “good news for Greece, very good news for the EU, for the euro and
also for Spain.”

The
victory means that New Democracy’s leader, Antonis Samara, will now work
towards forming a coalition government. EU finance ministers are scheduled to meet on 19 June to discuss the
outcome, amid reports that plans for emergency measures had been discussed in
the event that Syriza, under its leader Alex Tsipras, emerged the winner at the
polls.

The
news was also initially greeted with relief by the financial markets, with
stock markets in Australia, Japan, South Korea and Hong Kong closing higher.
However, a rally on other world stock markets on 18 June early morning trading
proved to be short-lived. Concerns over the eurozone’s other weaker members
revived, with Spanish bond yields moving back over 7%.

“The challenges facing the Greek economy
remain mountainous and the general feeling remains predominantly that the day
of reckoning has merely been delayed,” commented Michael Hewson, senior market
analyst at CMC Markets UK. “The outcome of the Greece election could prove to
be one of those results that could end up being potentially toxic to the
winner, given that the next government could well preside over Greece’s
eventual exit from the euro.”

Spokespersons at Barclays Capital said that
the result was in line with what the markets had anticipated. “The fact that
the centre-right New Democracy has won the most votes will be viewed as market
friendly because it reduces the likelihood of a near-term Greek exit from the
euro area, and will be viewed as making successful negotiations with the troika
somewhat more likely. Already on Sunday night euro area officials and the IMF [International
Monetary Fund] have expressed their willingness to look at adjusting some
elements of the (Greek austerity) programme, in particular its timing. Overall,
however, we expect the effect on the euro and risky currencies and assets to be
muted.”

Various possibilities for Greece’s future –
with differing degrees of probability – are being discussed by analysts. Among
the outcomes considered most likely is that Greece remains in the eurozone,
with Germany agreeing to moderate the austerity measures imposed on the country
and also for the other four ‘PIIGS’ economies of Portugal, Italy, Ireland and
Spain. This would be accompanied by the development of an EU growth pact.

However, it is also considered possible that
despite the election result Greece could still be forced to exit the eurozone
within the next 12 to 24 months. In the meantime, other eurozone members should
prepare for this scenario by strengthening their firewalls around bank
refinancing.

Two other potential scenarios, although less
likely, scenarios are that Greece exits the eurozone, reintroduces the drachma
as its official currency and defaults on its debts or that Syriza still
ultimately manages to carry through its election mandate of rejecting the terms
of the €130bn bailout, introduce a moratorium on debt and nationalise the country’s
banks.